How Banks Can Overcome Disintermediation

The threat of disintermediation has long haunted banks, and it only continues to rise.

Disintermediation has haunted banks for a long time, with the internet, Quicken, PayPal, Walmart, American Express and peer-to-peer lending names as causes. None, so far, have lived up to the disintermediation hype.

But, is the game changing? A phenomenon and a new market development may be the starting point.

The iPhone and, arguably, Android devices are the phenomenon. Before the iPhone, BlackBerry was the dominant mobile device for businesses. The original BlackBerry was fantastic for email, contacts and calendars, but not as a mobile application delivery platform. Now, the iPhone and other smart phones and tablets have effectively bridged over to the corporate world. Their impact on banks is accelerating.

The new market development is major consumer brands leveraging the distribution reach of the smart phones and tablets entering the bank space, targeting small and midsized businesses (SMBs).

Is Banking SMBs Up for Grabs?

Here’s how things are starting to play out.

Banks have long enjoyed a de facto status of providing SMBs with lending and financial deposit accounts. The power of “loans & deposits” is enormous; it tethers the SMB to its bank, which the bank then monetizes by cross-selling additional services. However, smart phones are changing the game and some large, well-known brands are targeting banks in these areas:

Treasury Management

Many well-known technology brands have launched iPhone and Android mobile apps and card swipe devices that allow SMBs to process credit and debit cards using mobile phones and tablets. On the surface, this advancement may seem inconsequential, especially given the slow adoption among the more established SMBs. Square, Intuit and a few others have, so far, been most successful in the microbusiness market.

However, three things can’t be overlooked. First, credit and debit card processing, or merchant services, is a core treasury management product that has long been the domain of banks. Second, Square processing all credit and debit cards for all Starbucks locations gives Square a few thousand “home bases” from which to market its mobile payments service. Lastly, major brands like Amazon, PayPal and Groupon have entered the mobile credit card processing space, bundling other services targeted at SMBs.

Loans

Lending is a tricky business that banks have mastered. Economic ebbs and flows like the recent recession, can limit access to banking capital but, directionally, lending is core banking. Recently, Amazon and Google launched lending products. Along with its e-commerce site and mobile payments solution, Amazon has launched a small business loan program.

Amazon gains security from being the business’ virtual landlord and having a sizable deposit as an SMB’s merchant account. Google just announced a line-of-credit program to help SMBs fund advertising on Google properties, while freeing capital for those SMBs to use in other areas. If there’s uptake, other super brands will surely follow in these footsteps.

Deposits

Deposits are a bank’s lifeline, since deposits generate more funds available for lending. And, many treasury management products -- including business checking, ACH/wire deposit, merchant services and payroll accounts -- result in deposits. Mobile credit card processing is powerful because the provider gains access to all those credit and debit card deposits.

So, instead of the bank being the only depository account, Square, Intuit, PayPal and Groupon are bundling a merchant account and gaining a share of an SMB’s deposits. And banks should now be concerned that two of their more traditional rivals, Walmart and American Express, are teaming up to develop a mobile prepaid card that will also act as an electronic checking account.

Best Practices

Undoubtedly, banks and financial services companies, especially larger banks, aren’t defenseless. Many have deployed a number of consumer-targeted mobile apps, such as mobile bill payment and e-check deposit. Mobile apps for businesses, however, are scarcer and generally deliver simple information, like account alerts.

Let’s face it. It’s not in a bank’s DNA to develop progressive mobile apps comparable to what the major brands are developing. So banks shouldn’t try. Instead, they should outsource mobile development to technology companies and then focus on best practices, or the back-office, which is what banks do best.

The major brands only know the front-office: the customer interface. Amazon has conquered the e-commerce customer experience. Square’s mobile user interface is simple and clean. Google is minimalistic and integrated with all things Google. However, none of these brands offer SMBs the ability to easily integrate usable data to their back-office accounting or ERP solutions, which is where an SMB feels pain. This is a bank’s core competency.

I would argue that Square and Intuit mobile payments acceptance devices-ádo not disintermediate-áthe banks.-á Instead, by allowing small merchants to accept credit and debit cards these "disintermediators" are actually-ádriving further interchange revenue for the issuers.-á

As for the Squares and PayPals, etc. taking away deposits from banks, this is yet to be seen.-á When a merchant accepts a payment on their Square device, the merchant does not hold the money in a Square account.-á It gets settled and sent to the merchant bank.-á

The real-áthreat is if these new players-ácan displace traditional point of sale-átransactions through some kind of digital wallet that bypasses any interchange fees and elimanates the FI from entire commerce experience.